5. You have secured a $50 million line of credit with a local bank. The terms of the arrangement are 0.5% interest per month and a 10% compensating balance on amounts borrowed (which is kept in a non-interest bearing account). The interest is compounded monthly but is due at the end of the year.

If you need to borrow $20 million in useable funds for a year (and do not have any other accounts at the bank), how much interest will you pay and what will be the effective annual rate of interest on your loan?

If you already have some pre-existing accounts at the bank that can satisfy the compensating balance requirements, how much interest will you pay and what will be the effective annual rate of interest on your $20 million loan?